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The use of schemes of arrangement in mergers and acquisitions has increased fivefold in the past two years, giving buyers greater control over the assets they acquire, bankers say.

Travelocityâs bid for Lastminute.com reflects the growing popularity of schemes of arrangement for takeover bids

When Travelocity, the online travel company, made its £606m (€886m) bid for Lastminute.com last week, it joined the growing number of companies using a scheme of arrangement in preference to a traditional offer to gain control of a company.

Schemes of arrangement differ from traditional offers because they require a lower level of shareholder acceptance to enable a company to take full control of a target and squeeze out minority shareholders.

Mark Warham, head of UK M&A at Morgan Stanley, which was sole adviser to Travelocity, said: “The increase in the number of schemes of arrangement may be down to people becoming more familiar with them, in part driven by the increasing number of bids by financial sponsors, who often prefer schemes because they typically want to ensure 100% control of a company.”

In the past 12 months, 20% of UK public takeovers have used a scheme of arrangement, compared with barely 4% three years ago. Corporate buyers have joined financial sponsors in preferring a scheme of arrangement to a bid. Pernod Ricard, the French drinks company, is using a scheme in its £7.4bn offer for Allied Domecq, while Grupo Santander, the Spanish banking company, employed a similar structure last year for its takeover of Abbey National.

Under a scheme – which requires court approval – if 75% by value of those voting and 50% by number vote in favour of the proposal and the High Court confirms the fairness of the procedure, the scheme becomes binding for all shareholders. This contrasts with a traditional offer, by which a bidder can gain control at 50%, but has to reach 90% of the target share capital before the remaining 10% of the target can be squeezed out.

Bidders can also avoid paying stamp duty by structuring deals as schemes of arrangement.
The increasing involvement of activist investors in M&A has made schemes of arrangement much more attractive. In a traditional bid, hedge fund investors can prolong and influence the outcome by remaining as minority shareholders and voting against the new owners on certain resolutions.

By using a scheme, an acquirer either wins 0% or 100% of a company and can squeeze out potential rebel shareholders.

In the past, bidders have avoided schemes of arrangement because gaining the requisite court approval was regarded as fraught with risk.

Adrian Clark, a partner at Ashurst, said: “Historically, this was thought to be a great threat. Nowadays the court seems to be a little more flexible. Many schemes proceed quite happily, steering their way round the traps of court holidays and various procedural uncertainties around things like the use of irrevocable undertakings and flexibility in the event of a competing bid.”

Schemes have passed into mainstream M&A in direct proportion to the rise in private equity-backed, highly leveraged deals. Clark added: “In particular, equity houses and the lenders to highly leveraged public-to-privates didn’t like the look of taking control of a target in a situation in which there was one large holder and lots of small holders left outstanding, and no obvious way of getting rid of them for the foreseeable future.”

This was partly because they wanted to be absolutely sure they could get security over the target’s assets for the financing. They could only be sure of this if the target company could be made to pass various special resolutions following acquisition.

Lenders in a buy-out use the assets in the target company as security for their loans. A company that agrees to this is providing financial assistance for the purchase of its own shares. This is against the law unless a 75% majority of shareholders approve it and no group of shareholders representing 10% or more of the shares successfully appeals to the courts against the approval.

Thus, a buy-out firm needs at least 90% of a public company’s shares to be sure of its debt finance.

Bidders are less likely to opt for a scheme of arrangement in a hostile or competitive bid. In the battle last year for control of Canary Wharf, the UK’s tallest building, the consortium backed by Morgan Stanley swapped its scheme of arrangement for a traditional offer because it did not feel it could get to 75% acceptances, but was confident of securing 50%.